Challenges and opportunities in a new economic order

adminmarzo 3, 2012Comentarios desactivados en Challenges and opportunities in a new economic order

The Asian boom is a reality and the raw materials needed by these countries, primarily China and India, are transforming the commodities markets and blurring the line between developed and developing economies, thereby realigning the political influences into a new order.

Based on estimates by the International Monetary Fund (IMF) the world GDP could grow at a rate of US$4 trillion per year in the next five years, and Asia would contribute about 40% of its total. Nowadays, the Asia-Pacific region accounts for close to 30% of the global economy. Within this context, investors and policymakers of the major growth hub in the world are targeting Latin America because of its richness in minerals and energy.

Besides China, countries like India, Singapore, Indonesia, Japan and South Korea are securing current and future resources needed to ensure the sustained growth they have achieved during recent years. So far most of the takeovers have focused on multiple investments in Africa, Asia and Australia. Examples of China’s incursion into Africa can be seen with the investment of US$3 billion by Sichuan Hongda Co. in two iron ore mines in Tanzania, and US$1.2 billion offered by China Guangdong for Kalahari Minerals and its uranium operations in Namibia.

Concurrently, India is taking advantage of its proximity to Australia and the coal potential of its neighbor across the Indian Ocean. The Adani Group, based in Gujarat (India), paid a total of US$3.1 billion for Linc Energy’s coal project in northwestern Queensland, which was the largest takeover by an Indian multinational in Australia.

However, Asia’s dynamics has already led some analysts to predict an increased demand for commodities from the East in coming years. Hence, countries like Chile, Peru, Brazil, Argentina, Mexico and Colombia, among others, would become strategic partners for the sustainability of Asia’s economy.

Last year, a joint venture of the Indian state-owned enterprise International Coal Ventures Pvt Ltd. (ICVL) was in Colombia in order to acquire coking coalmines. Meanwhile, China has been shopping in many of the countries in the region. Among recent Chinese businesses in South America are: Sinopec-Repsol in Brazil (US$ 7.1 billion), CNOOC-Bridas in Argentina ($US 3.1 billion) and the Minmetals-Geleno project in Peru ($US 2.5 billion).

The strong link being developed between South America and Asia is evident between China and the two most important economies in the region, Chile (the most developed) and Brazil (the world’s fifth largest economy). Approximately 60% of Chile’s mining exports are shipped to Asia, and in that region China is accountable for 30% of Chile’s total exports, thereby creating a growing demand for Chilean commodities, particularly copper.

On the other hand, China is Brazil’s major trading partner. The growing incursion in Asia of Vale –the second biggest mining company in the world headquartered in Rio de Janeiro-, is an interesting phenomenon. Since December 2010, this Brazilian giant is listed on the Hong Kong Stock Exchange (HKSE), becoming the largest real sector company to venture into the HKSE. This Brazilian company is also investing in iron projects in China. One of the highlights is a joint venture with Anyang Iron, based in Henan Province (China) for the construction of a plant with a capacity of 1.2 million tons of iron.

However, as the influence of Asian countries (particularly China) grows, and the influence of the United States and Europe stagnates, the distrust towards China also increases. Recently, at the World Economic Forum held in Davos (Switzerland), some of the participants stated their discontent with the manipulation of the Yuan by Chinese authorities. Additionally, there is dissatisfaction regarding the gap between Chinese consumers and businesses that export and save more than their counterparts in Europe and the United States. And there is also heightened mistrust resulting from the spree of Asian takeovers aimed at ensuring their supply of commodities from Africa, Latin America and even Canada and the United States.

In the mining and industrial sectors, China’s monopoly over rare earth metals, which are essential for multiple electronic devices, raises suspicion. In January a panel of appeals of the World Trade Organization (WTO) upheld a ruling against China’s export restrictions on rare earths, in violation of international trade rules. United States Trade Representative, Ron Kirk, described the decision as a “tremendous victory” for the United States.

The truth is the dominant role of Asia in the mining world is a real phenomenon with a long lasting global impact. Japan, which since 1975 was the largest importer of coal in the world, was surpassed last year by China. Currently, China is not only the largest coal producing country but also the top consumer, which has led it to become the number one coal importer as well.

Taking this scenario into consideration, it is inevitable that China will be forced to open up to the world, to adjust its business practices and to improve its behavior towards other countries. This will help build clear international rules for everyone’s benefit.